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Whatever happened to the dollar funding crisis?
If you’ll remember — central banks restarted dollar swap lines in May, after fears of banks’ exposure to bad sovereign debt dried up liquidity in the market. There wasn’t exactly a stampede to use the facilities when they opened, though.
Two months on, we’ve been left with funding pressures for some banks, but not an overall crisis, say Barclays Capital’s analyst Laurent Fransolet and team.
As they note (emphasis and link ours):
…we estimate that non-US banks borrow about $1.5trn in the USD wholesale funding markets to fund about $1.2trn (according to BIS estimates) in USD assets. Of the $1.5trn, we calculate that about $925bn is in wholesale deposits, $370bn in commercial paper, and $170bn in a net short repo position.
If there were truly a funding crisis, we would expect foreign banks to bid aggressively for wholesale deposits in the US, and to repatriate existing dollars back to their head offices. Neither has happened in size so far, unlike in the financial crisis of H2 08. Similarly, US branches of European banks still keep hundreds of billions of dollars in excess reserves at the Fed. Why would firms lend to the US central bank at 25bp if they were facing issues financing themselves even at much higher levels? Finally, Euribor has lagged the rise in Libor over the past couple of months (unlike in H2 08), and Libor itself has stabilized for several days.
Indeed Libor has. It hit a one-month low on Monday, although many expect much higher rates by the autumn. The EURUSD basis swap still suggests a continued preference for dollars, though:
Which indicates to BarCap that some small to middling European banks are indeed still in trouble, behind their bigger, Libor-fixing peers.
Which is also suggested by European access to the US commercial paper market, according to BarCap’s Joseph Abate. This was another mini-crisis to watch in spring, after steep falls in buying of foreign banks’ paper in response to debt fears, plus some regulatory changes in money funds’ holdings.
As Abate notes, banks have discovered a workaround:
Continental European banks are not locked out of the dollar commercial paper market "“ although they might struggle to access it… To cope with the more difficult environment, these banks have begun offering 7-day putable securities with final maturities of 6m or 1y. Issuance of putable paper has totalled more than $15bn over the past two weeks…
Assuming the put is not exercised the Continental banks now have access to term money which previously was unobtainable. Likewise the paper meets the 7-day liquidity requirements imposed on money funds by the SEC and it limits counterparty credit risk to just a week for nervous investors.
That would have to be quite some nervousness. Not that all puts are apparently so short, though. A large Spanish bank, Abate says, has managed to issue paper with a one-month put.
Lucky them. We’d love to know whom.
Related links: More on those USD swap lines… – FT Alphaville Calming down on bank credit risk – FT Alphaville "?Heightened levels of interbank funding could be with us for some time' – FT Alphaville
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